Retirement Guys: The financial blind spotWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
The other day my wife and I were driving to lunch. We were just cruising along, enjoying the day. I was obeying all the laws, going the speed limit, keeping a safe distance in front of us and was staying in my lane. Then all of a sudden my wife said “Watch out!” She even for a second went to grab the wheel and nudged us out of harm’s way, as the car in the next lane about sideswiped us. I never even saw the car coming into our lane because it was in my blind spot.
Luckily we avoided getting into an accident. Instead of spending our lunch hour filling out a police report or spending the day in the hospital — besides a little elevated blood pressure — everything was fine thanks to my wife protecting my blind spot.
Oftentimes, the same thing happens financially for investors. Everything is going fine and an investor is just cruising along when all of a sudden, a danger appears out of nowhere in the blind spot. That is why it is a good idea to have someone along for the ride, someone who can see things from a different perspective. Many investors cannot afford to have another wreck financially. To get a different viewpoint, investors should talk with a financial professional about the risks lurking in their blind spot.
FINRA, the Financial Industry Regulatory Authority, defines systematic risk as “market risk and relates to factors that affect the overall economy or securities markets.” A couple of main risks we see right now are interest rate risk, inflation risk and geopolitical risk. Here are some ideas on how to deal with those risks.
Interest rate risk continues to affect many savers and investors who are living off fixed income investments, and according to recent talks by the Federal Reserve, this risk could continue for years. For those with debt, this is an opportunity to pay less on borrowed money. An example is the fact that I’m refinancing my mortgage to a 15-year fixed loan at 3 percent interest rate. Yet, for savers and investors, these decade-low interest rates mean that after factoring in taxes and inflation, an investor in most fixed-rate investments is losing money safely. A way to address this risk is to look at other alternatives that can still provide an investor with the correct amount of safety and income with more upside potential. Alternatives such as fixed-indexed annuities, structured FDIC insured CDs or government bonds are options to consider.
Inflation risk is affecting seniors and retiree’s. For many younger Americans, inflation is not a major risk right now. In fact, in several categories such as electronics, prices continue to decline. Where we see risk for a senior, retiree, or someone who is approaching retirement is rising health and living expenses. One way to address this issue is to purchase investments that mature at different time frames during the next three to 10 years. This strategy is known as laddering a portfolio, with a goal of giving an investor a “pay raise” along the way. To address the risk of rising health care costs use “levertrage.” Although that is a word we created, it is one part leverage and one part arbitrage, meaning an investor takes unproductive assets and immediately creates benefits in absence of time, taxes and risk.
Geopolitical risk around the world is also important to pay attention to. The problems overseas that were headline news last summer still exist today. The worldwide debt time bomb is still ticking and may blow up. An investor could deal with this risk by using proper asset allocation, diversification, and having a clear exit plan in place for when risk gets too high. The goal of diversification is to reduce risk, although it doesn’t guarantee an investor against loss. Diversification can be accomplished by increasing the number of holdings or purchasing investments that are different from one another.
Dealing with risk is a normal part of everyone’s day. We take risks getting out of bed and getting in our car to go to the store. Dwelling on risk can be very unproductive. It is best to deal with risk head on, be brave enough to face the risks, get knowledge from others to avoid blind spots and take action to eliminate as much risk as possible.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysradio.com. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. (419) 842-0550.
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